The new consumers in India’s villages are ambitious and demanding just like their urban counterparts. And Hindustan Unilever is responding to the change with a distribution overhaul
Soon after he assumed his new role two years ago, Hemant Bakshi realised he had an interesting problem on his hands. As Hindustan Unilever’s executive director in charge of customer development, Bakshi had to find a solution that had eluded the company for nearly 25 years. It had taken more than seven decades for Hindustan Unilever’s famous distribution juggernaut to directly reach a million outlets across the country. But for the next two and a half decades, Bakshi’s senior colleagues simply couldn’t find a viable way to expand its direct distribution model.
So when HUL chairman Harish Manwani announced on the sidelines of its annual general meeting in July that the company was in the midst of trebling its rural coverage over two years, it set the cat among the pigeons. This increase in rural coverage will be a big leap, “and to my mind, will be a huge driver of future growth,” Manwani had said. “While competitors are closing gaps, we have to continuously create new gaps.” So had HUL stumbled upon a new magic formula all of a sudden that would help it crack open the large rural opportunity?
Not really. All that Bakshi’s team did was to question something that Lever managers had believed over decades. All along, HUL had operated on a basic hypothesis: Rural markets were at a different stage of evolution from urban markets. As a result, consumers were given limited variety of stock — mostly the mass market and discount brands — and that too in small pack sizes or sachets. That ensured that HUL distributors were able to keep costs low, rotate their stock and reach even villages with a population of 5,000 people. This way, HUL’s distribution machine pushed deeper into the hinterland, till the cost-benefit ratio began to work against the company. At one stage, it found it difficult to expand into villages with less than 5,000 people.
It isn’t as if HUL’s brands didn’t find their way to the 637,000-odd villages in the country. Thanks to the remarkably efficient network of wholesale traders, it invariably did. But then, so did hundreds of other competitive brands. And from time to time, they used higher trade margins to snatch away HUL’s business.
There was another issue: availability of credit. Pradeep Kashyap, CEO of rural marketing consultancy MART, says he’s seen several instances of shopkeepers offering low-priced brands (other than HUL), if they knew they had to sell on credit to, say, a low income farmer. On the other hand, when a rich farmer came along, a bar of Lux soap automatically comes out of the bottom shelf. “It is crucial for a company to offer credit to shopkeepers. And this can be done only by direct distribution,” says Kashyap. Sales through the wholesale channel are seldom done on the basis of credit.
So, here’s the moot point: Just how did Bakshi’s team take the big leap forward?
The Way It Was
In the past, HUL had relied on its network of 2,700 redistribution stockists and sub-stockists to supply products to stores in large villages. For smaller villages with a population of less than 5,000, its products were sold through wholesalers. Shopkeepers from these villages would travel to these wholesalers and to pick up their supplies as and when it suited them. Sometimes wholesalers known as star sellers would hire a van and do some distribution on their own. At best, the distribution in these villages was patchy and the company had no strategy on whom to cover and whom to leave out.
In the late 1990s, HUL took its first tentative step to expand rural distribution. Through Project Streamline, it created a hub and spoke system and appointed sub-dealers who had the opportunity to serve villages in their vicinity. While the model served the company well, HUL had little or no control over the distribution chain. Smaller regional brands would come along, offer better markups and sell goods on credit and take away a significant portion of business in a short span. Significantly, the shopkeeper who stocked HUL products felt no loyalty to the company and could switch sides overnight.
Starting 2001, it began expanding its reach through Project Shakti, where it used women entrepreneurs in distant villages to stock and sell its brands. Today, it has a vibrant network of 40,000 women entrepreneurs. But Project Shakti was also the last round of expansion in distribution that the company undertook.
With revenues from Project Shakti doubling every two years, Lever knew the next significant opportunity was in rural India. But to get in on the action, it had to fix distribution first.
Changes on the Horizon
In contrast, rural areas are still in the growth mode and distributors are expected to actively push shopkeepers to stock HUL soaps, shampoos and detergents. Pushing products and grabbing store space is still very much the name of the game. Promotion through merchandising and display will play a key role. Add to that the higher cost of raising capital for smaller outfits and the company still offers them healthy markups of 5 percent. Most distributors make about 2-2.5 percent on the goods sold. They usually have two weeks’ worth of stock with shopkeepers and one week’s worth of inventory, which allows them to turn them over 17 times a year leading to a return of at least 34 percent. This takes care of their cost of capital as well as allowing them to invest in technology. (The company declined to comment on the return on investment for rural distributors).
(This story appears in the 24 September, 2010 issue of Forbes India. To visit our Archives, click here.)